Negative AGI increases some Sched A deductions? (!)

When Form 1040 Line 38 is negative, it appears that some Sched A deductions are __increased__, notably Line 4 and Line 27.

And Turbo Tax seems to agree.

But is that right? (!)

I would expect the instructions for Sched A to indicate that the amounts in Line 2 or 3 and Line 25 or 26 should be no less than zero.

Or the instructions for Form 1040 to indicate that the amount in Line 38 should be no less than zero.

Am I overlooking instructions to that effect somewhere?

Reply to
dreamer00408
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I would expect the instructions for Sched A to indicate that the amounts in Line 2 or 3 and Line 25 or 26 should be no less than zero. Or the instructions for Form 1040 to indicate that the amount in Line 38 should be no less than zero. Am I overlooking instructions to that effect somewhere? =========== Yes, that is correct. The deduction is the difference between the expense and the appropriate AGI floor. There is no return instruction to treat the percentage as zero because that's not consistent with the law.

The IRS will often send a "math error correction" for this, but when you challenge them on what the IRC actually says, they will back down. This is a "secret issue" they don't want to take to the Tax Court.

I had this situation on a 2007 return. When they proposed the math error correction, I challenged them and demanded a 90-day letter. The IRS backed off.

The reason why they back off: There is no statute nor regulation which says to treat a negative AGI as if it were zero for the purposes of computing a percentage of AGI as is needed for medical, casualty, or certain miscellaneous itemized deductions. The computation for charitable contributions is done differently in the law (the percentage is a CAP, not a FLOOR value).

There is also no statute nor regulation that says that a deduction is limited to the expense when the deduction is defined as the amount the expense exceeds an artificial value.

Reply to
D. Stussy

When the AGI is less than zero, is your software subtracting a negative number to arrive at the "higher" Schedule A deductions? That is appalling!!

Reply to
lotax

Your medical expense deduction is limited to the actual qualified expenses you incurred. A negative AGI does not create an expense that you did not incur. Once AGI hits zero (counting down) you get to deduct all the medical expense you incurred. You do not get to deduct a number that represents the difference between AGI and your total expense. In other words, once AGI hits zero, there is no additional benefit relative to itemized deductions if AGI goes negative. This is true for any itemized deduction that has an AGI limitation.

So... if you enter $10,000 as medical expenses into your software detail worksheet, Schedule A can not show a number that exceeds $10,000. If it is doing that any time AGI is negative, it is dead wrong.

Reply to
Alan

Alan,

You know the answer isn't so clear-cut based on an extended discussion you had with D. Stussy some years ago.

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Apparently, he was successful in getting the use of a negative AGI to increase medical expense deduction through an IRS audit. Of course, his success doesn't establish precedent and his argument flies in the face of logic.

Ira Smilovitz

Reply to
ira smilovitz

Thanks, Alan and Ira. The D.Stussy discussion was particularly interesting.

However, this appears to be a defect in Turbo Tax(!).

TT had determined that I could use the standard deduction for the 1040, but I needed itemized deductions for the Calif 540.

So Sched A was attached to the 540, not the 1040. And it is there that TT __increased__ the med and misc deductions because of the negative AGI, exactly as D.Stussy described.

However, when I force TT to use itemized deductions for the 1040 as well, Sched A is corrected: Lines 3 and 26 are capped at zero, as Alan (and I) would expect.

So I suspect that the negative amounts in Lines 3 and 26 are the result of incomplete Sched A calculation because it is not used for the 1040.

Problem is: I cannot seem to avoid that.

When I reverted to using the standard deduction for 1040, the Sched A attached to the 540 shows the wrong calculation again, with negative amounts in Lines 3 and 26, thereby __increasing__ the med and misc deductions.

Since I will file the 540 by USmail, not eFile, I can correct the problem by attaching the Sched A that TT creates when I itemize deductions for the 1040.

It might not be worth my time and effort to convince TT that it has a defect. I'll see if there is an easy way to report it without being put on hold.

And I agree with Alan in the D.Stussy discussion: since NOL does not apply to me, all of this is moot since AGI is negative anyway for both federal and Calif tax returns.

Still, it's the principle of the matter. I certainly think the TT defect should be corrected. But I also think the instructions for Sched A should be corrected. Probably elsewhere, too.

Thanks again for the discussion.

Reply to
dreamer00408

Thanks, Alan and Ira. The D.Stussy discussion was particularly interesting.

However, this appears to be a defect in Turbo Tax(!).

TT had determined that I could use the standard deduction for the 1040, but I needed itemized deductions for the Calif 540.

So Sched A was attached to the 540, not the 1040. And it is there that TT __increased__ the med and misc deductions because of the negative AGI, exactly as D.Stussy described.

However, when I force TT to use itemized deductions for the 1040 as well, Sched A is corrected: Lines 3 and 26 are capped at zero, as Alan (and I) would expect.

So I suspect that the negative amounts in Lines 3 and 26 are the result of incomplete Sched A calculation because it is not used for the 1040.

Problem is: I cannot seem to avoid that.

When I reverted to using the standard deduction for 1040, the Sched A attached to the 540 shows the wrong calculation again, with negative amounts in Lines 3 and 26, thereby __increasing__ the med and misc deductions.

Since I will file the 540 by USmail, not eFile, I can correct the problem by attaching the Sched A that TT creates when I itemize deductions for the

1040.

It might not be worth my time and effort to convince TT that it has a defect. I'll see if there is an easy way to report it without being put on hold.

And I agree with Alan in the D.Stussy discussion: since NOL does not apply to me, all of this is moot since AGI is negative anyway for both federal and Calif tax returns.

Still, it's the principle of the matter. I certainly think the TT defect should be corrected. But I also think the instructions for Sched A should be corrected. Probably elsewhere, too.

Thanks again for the discussion. ====================== I would argue that it's not a defect (at the state level).

Show us where in the IRC (or CA R&TC) that it says that if AGI is negative, its percentage is treated as zero.... It's not in the statutes. It's not in the regulations. It's not even in the form's instructions. If it were, your question would be answered. ;-)

Reply to
D. Stussy

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